Which PMI Option is Best? Lender or Borrower paid PMI?
In most cases, if a borrower is applying for a conventional loan that exceeds 80% of the appraised value, the lender will require some form of Private Mortgage Insurance or PMI. Generally, you will have the option of selecting either borrower paid mortgage insurance (BPMI) or lender paid mortgage insurance (LPMI).
The borrower paid mortgage insurance option can usually be paid monthly or as a one-time lump sum at closing. The lender paid option involves paying a higher interest rate on the mortgage in exchange for the lender paying the premium for the PMI. Meaning the borrower would not have to pay PMI monthly or at closing.
There a number of variations for both categories, but for the sake of keeping this simple we will only consider BPMI and LPMI.
The example below shows the difference between the LPMI and BPMI options over an 11 year period. Eleven years was used because that is the approximate time it will take for the loan to be paid to 78% and thus the BPMI could be canceled. Please feel free to contact us for any of your Pennsylvania or New Jersey mortgage needs.
Please note that the difference in the total payment is only $13.06 per month. This small amount is unlikely to make a difference either way. The interest you save over the first 11 years is only slightly more than the savings you incur by not paying a monthly PMI payment.
Example: $200,000 loan after putting down 10%
|Monthly PMI||Rate||Monthly Payment||Years to removal||Interest Over 11 Yrs||Interest Savings||Monthly PMI Savings|
So which is the better option?
It all comes down to how long you plan to be in the home. The longer you plan to be in the home the more you will likely benefit from the borrower paid mortgage insurance option. This is because eventually the BPMI can eventually be canceled as the loan is paid down and you will realize a greater benefit from the lower interest rate.
Conversely if you don’t plan to be in the house for long and the absolute lowest payment possible was important to you it may makes sense to go with lender paid mortgage insurance. You can use one of the mortgage calculators here to determine your own savings.